Kaplan Pgs 326-344 Fiduciary and Shareholder Suits

Question 1

Who owes a duty of care?

Answer 1

Directors, officers, and incorporators

Question 2

What is involved in the duty of care?

Answer 2

The director, officer, or incorporator must perform his duties:
– in good faith
– for the best interest of the corporation
– with the same amount of care that an ordinarily prudent person in the same position would

Question 3

Will negligence or an error result in a breach of the duty of care?

Answer 3

No

Question 4

If a director or officer shows that he had no knowledge of a problem, can he avoid liability under duty of care?

Answer 4

Not if it can be shown that he could have gained that knowledge in the exercise of reasonable care

Question 5

Basically what does the business judgement rule do?

Answer 5

It creates a rebuttable presumption that directors are honest and well-meaning and acting through decisions that are informed and rationally undertaken in good faith

Question 6

In what circumstances does the business judgement rule not apply?

Answer 6

When the duty of loyalty is at issue, or if the decision was illegal, egregious, fraudulent, involved a conflict of interest, made in bad faith, or uninformed

Question 7

What are the situations when a director can rely on information, opinions, reports and financial statements and records?

Answer 7

• when they come from officers or employees that are reasonably believed to be reliable and competent
  – from counsel, public accountants, or others that the officer or director reasonably believes are within that person’s professional or expert competence
  – a committee of the board upon which the person does not serve about things that the director reasonably believes to merit confidence

Question 8

If a majority of shareholders ratify an action with full disclosure, can a director be liable under the business judgement rule?

Answer 8

No

Question 9

If a director is present at a meeting of the board but abstains from voting, what is the assumption?

Answer 9

That he approved the action

Question 10

What is the rule for distribution of assets once institution of dissolution proceedings have begun?

Answer 10

Distribution cannot be made until all non-liabilities have been paid or provided for

Question 11

What is the only situation that a corporation can make a loan to a director or officer or guarantee those things?

Answer 11

If the transaction is approved by a majority of the shareholders

Question 12

How does contribution work with directors?

Answer 12

Any director that has a successful claim asserted against him is entitled to contribution from other directors who would be liable

Question 13

In a suit for breach of duty of care, who has the burden of proof?

Answer 13

The plaintiff must prove that the director was negligent

Question 14

Basically the duty of loyalty says what?

Answer 14

The fiduciary duty of officers, directors, and employees requires that they be loyal to the corporation and not promote their own interests in a manner that is injurious to the corporation

Question 15

What are the two situations that allow a director or officer to take a corporate opportunity?

Answer 15

• if the opportunity was fully disclosed to the corporation, the corporation first had a chance to pursue it, and decided not to
  – if the corporation could not have taken the opportunity

Question 16

What are the factors to consider when deciding if a corporate opportunity has been usurped?

Answer 16

• if the individual became aware of the opportunity while in his capacity as a director or officer
  – if the business is closely related to the corporation’s
  – if the board expressed an interest in acquiring that type of business
  – if the opportunity is in the corporation’s line of business
  – if corporate funds or facilities were used to discover or develop the opportunity

Question 17

What are the remedies when a director or officer has breached a corporate opportunity?

Answer 17

• benefits can be held in constructive trust for the corporation and will have to convey any property, income, or profits that were derived from the misappropriation, or
  – damages can be assessed

Question 18

Who has the burden of proof with regard to duty of loyalty?

Answer 18

The Director must show that he did not break his duty of loyalty

Question 19

What is required in order for a Director, officer, employee, or agent of a corporation to get indemnification for expenses for legal proceedings?

Answer 19

Dash if he acted in good faith and what he reasonably believed was the best interest of the corporation
– for criminal cases, if he had no reasonable cause to believe his actions were unlawful

Question 20

What situation is indemnification mandatory?

Answer 20

If the Director, officer, employee, or agent was successful on the merits

Question 21

In essence, what does rule 10 B5 do?

Answer 21

It is an anti-fraud provision that prohibits false or misleading statements in connection with the purchase or sale of securities

Question 22

How has ryutetsu B5 changed from when I learned about it in school?

Answer 22

It prohibits:
– the use of any device, skim, or artifice to defraud
– omissions and missed statements of material fact, and
– any act, practice, or course of business that operates as a fraud or deceit

Question 23

What are the elements of rule 10 be five?

Answer 23

– A misrepresentation or omission of material fact
– C enter or knowledge by the defendant of the misrepresentation, or reckless disregard of the truth
– causation
– materiality
– reliance of the plaintiff [usually assumed if the fact was material]
– damages

Question 24

What are the damages under 10 B5?

Answer 24

The difference between the price that the plaintive bought or sold the stock and the price of the stock within a reasonable time after the inside information was made public

Question 25

What is considered to be inside information?

Answer 25

Information that the market does not know

Question 26

What is required for insider trading?

Answer 26

Materiality and scienter (someone has traded on material inside information with knowledge or intent)

Question 27

What do you many quarts say about insider trading?

Answer 27

That it is a breach of fiduciary duties owed to the corporation because the inside information is a corporate asset that cannot be exported for personal gain. So constructive trust can be imposed on any profits gotten from such trainingm

Question 28

What are situations that make it so that you don’t have to make a demand on the corporation and wait 90 days before you bring a derivative suit?

Answer 28

Dash if the shareholder has been notified that the demand has been rejected by the corporation
– if irreparable injury would result by waiting
– if the demand on the directors would be futile because: a majority of the board is interested, the directors failed to inform themselves about the transaction, or they feel the exercise their business judgement

Question 29

When will a court dismiss a derivative proceeding?

Answer 29

If a majority of this interested directors determined in good faith after a reasonable inquiry that the suit was not in the corporation’s best interests